In 2013 I've worked in Virginia and lived in Maryland the entire year. My wife worked in Maryland.

My employer withheld state taxes for Virginia (I asked my employer whether he could withhold my state taxes for Maryland instead of Virginia, and he said that he couldn't do it). My wife's employer withheld state taxes for Maryland.

We filed a non-resident tax return in Virginia, and got all the withheld state taxes back.
We filed a resident tax return in Maryland and payed the tax we owed on 4/15/2014.

We recently received a letter from the Comptroller of Maryland saying that we owe an interest for underpayment of of estimated tax.

The letter says :

(205) - You owe interest because your withholding and/or estimated tax payments were not sufficient to meet the requirements of the law.

Since it's not my fault my employer didn't withhold state taxes for Maryland, why should I be punished? Is there a way to avoid this penalty?

2 Answers
2

Ultimately, you are the one that is responsible for your tax filings and your payments (It's all linked to your SSN, after all).

If this fee/interest is the result of a filing error, and you went through a preparing company which assumes liability for their own errors, then you should speak to them. They will likely correct this and pay the fees.

On the other hand, if this is the result of not making quarterly payments, then you are responsible for it. (Source: Comptroller of Maryland Site)

If you [...] do not have Maryland income taxes withheld by an employer, you can make quarterly estimated tax payments as part of a pay-as-you-go plan.

If your employer does withhold Maryland taxes from your pay, you may still be required to make quarterly estimated income tax payments if you develop a tax liability that exceeds the amount withheld by your employer by more than $500.

From this watered-down public-facing resource, it seems like you'll get hit with fees for not making quarterly payments if your tax liability exceeds $500 beyond what is withheld (currently: $0).

The reciprocity agreement in the Washington DC area means that you only pay income taxes where you live, not where you work. Because you live in Maryland you only need to pay income taxes to Maryland.

You need to do the following things.

Have your employer stop sending tax money to Richmond VA. You owe Virginia nothing. But you will have to file again with Virginia to get your 2014 withholding back. The Virginia version of the W-4 allows you to stop sending money to Virginia:

Line 3. If you are not subject to Virginia withholding, check the box
on this line. You are not subject to withholding if you meet any one
of the conditions listed below. Form VA-4 must be filed with your
employer for each calendar year for which you claim exemption from
Virginia withholding.

(a) You had no liability for Virginia income tax
last year and you do not expect to have any liability for this year.

...

(d) You are a domiciliary or legal resident of
Maryland, Pennsylvania or West Virginia whose only Virginia source
income is from salaries and wages and such salaries and wages are
subject to income taxation by your state of domicile.

Ask your employer about getting a tax id number for Maryland. Many employers do this. I found a Business FAQ on the State of Virginia website discussing the opposite situation, I assume similar paperwork for Maryland is possible.

My company has its only office in Maryland, and conducts all of its
business there. Several of our employees are Virginia residents who
commute to work on a daily basis. Are we required to withhold Virginia
income tax from their wages?

No. Because your company is not paying wages to employees for services
performed in Virginia, you are not required to withhold Virginia tax.
If you would like to withhold the tax as a courtesy to your employees,
you may register for a Virginia withholding tax account online or by
submitting a Registration Application.

You can have extra money be withheld from your spouse's Maryland pay. If you are filing joint the IRS and the state department of taxation don't care which spouse has the funds withheld. The key is making sure that enough money is withheld from the Maryland income to cover the taxes for both. With less than a half a year left it may be hard to do. You will need to set the state version of the W-4 to zero (maximizing withholding) or even have additional money withheld.

Additional withholding per pay period under agreement with employer.
If you are not having enough tax withheld, you may ask your employer
to withhold more by entering an additional amount on line 2.